How much $ is needed to never have to work again?

[maxtower]

You could buy dividend paying stocks, such as the mergeant Dividend Achievers index. The growth rate of the dividends is faster than the rate of inflation. Principal will fluctuate, but you'll only be spending the dividends, so you won't have to actually sell any shares. This should insulate you from the big early drop scenario that destroys a lot of retirement plans.
Buy enough shares to pay your monthly expenses.

[Evan]

Metetron, here's a little quick and dirty analysis of why I wouldn't use equities for the "how much do I need to never work again" scenario. It's not exact because I'm in the living room on my roommate's laptop and it doesn't have excel, so this is the best I could do in Google Docs without wasting a ton of time.

I took the returns of every 12 month sample of the S&P 500 going back to 1950. To be clear, April 06-April 07 is one sample, March 06-March 07 is another. So each month gets counted 12 times. This probably isn't statistically perfect, but it's a close enough approximation for not having excel.

Average return: 8.3%
Standard deviation: 14.8%

Positive "years": 491
Negative "years: 185

Winning:Losing: 2.67:1
% losing: 27.4%

Let's call 5% our benchmark long term risk free rate..
Z score: (x-m)/s=(.05-.083)/.148=-.22
Cumulative normal distribution: 41.2% the return of equities will be less than the risk free rate


Falling below the benchmark rate is a big deal in a scenario, like this one, where you're withdrawing money every month or year. It's not just an issue of catastrophic disaster.

[TheMetetron]

Is that not made up by the market overperforming some other time in the 20 years necessary for no growth of the principal before we are busto?

I mean I see that losing 30% sucks big ass because now our gains are only on 70% of our initial investment, but I don't see how only gaining 2% the first year is going to break this plan.

I'm not saying it will never not work, and I'd definitely recommend a bond/equity mix, but it isn't as dire as some of you are making it to be.

[kimchi]

What about buying an open market annuity?

Obviously maybe not suitable for a younger person. Not sure if these are available in The US, or what the rates are, but I'll convert some example UK annuity rates to $US

60 year old male
$730p.a. per $10000 or
$460p.a. per $10000 for an escalator annuity

so if you need $35000 per year to live, you can buy an annuity for around $750,000

Of course if you're younger you'll need a lot more.

The good news - if you're a smoker, you need a lot less.

[pig4bill]

I'd be pretty comfortable with a half-mill. Somebody give it to me and I'll prove it to you. [img]/images/graemlins/smile.gif[/img]

[Ludanto]

pig4bill, please explain.

---------

Thanks all for the responses. This is really interesting in my opinion and people answering in numbers between 750k and 7,2M shows that the answer to the problem is not obvious.

---------

edtost, Evan: What kind of books or websites would I need to read to gain knowledge about the calculations you perform?

--------

Question for all:
Is a person who is studying economics or finance of some sort automatically a lot more probably to never have to work again compared to a person who hasn't studied in this field?

[edtost]

Investment Science by Luenberger has a good section on annuity valuation/pricing, which is basically the calculation I was doing. As an intro to this stuff, it may be overkill, but its a great book on basic financial concepts and the math supporting them, that doesn't resort to really dry theorem-proof style writing.

[pig4bill]

[ QUOTE ]
pig4bill, please explain.

[/ QUOTE ]

Explain why I want someone to give me a half-million? [img]/images/graemlins/smile.gif[/img]

I feel reasonably confident I can make 12 to 15 percent a year off the market, so I would take 200k and trade my usual way to make my nut. I would keep the other 300k in T-bonds in case the market got really weird or I got too aggressive and lost the stake. If I had to re-load, I would back off the aggression and would only need to make 8% because of the bigger stake. Note that taxes on $24k are nearly non-existant, so a couple percent here or there to cover taxes wouldn't matter to me.

[ QUOTE ]
Question for all:
Is a person who is studying economics or finance of some sort automatically a lot more probably to never have to work again compared to a person who hasn't studied in this field?

[/ QUOTE ]

No. Who's going to be "teaching" you this stuff? Someone that needs a job. How can they teach you something they don't know?

Besides, their institutionalized uncreative thinking is the type that leads them to advise everyone to buy index funds or mutual funds.

[edtost]

[ QUOTE ]
What about buying an open market annuity?

Obviously maybe not suitable for a younger person. Not sure if these are available in The US, or what the rates are, but I'll convert some example UK annuity rates to $US

60 year old male
$730p.a. per $10000 or
$460p.a. per $10000 for an escalator annuity

so if you need $35000 per year to live, you can buy an annuity for around $750,000

Of course if you're younger you'll need a lot more.

The good news - if you're a smoker, you need a lot less.

[/ QUOTE ]

keep in mind that the annuity you need increases disbursement each year by the rate of inflation.

[Evan]

[ QUOTE ]
Is that not made up by the market overperforming some other time in the 20 years necessary for no growth of the principal before we are busto?

I mean I see that losing 30% sucks big ass because now our gains are only on 70% of our initial investment, but I don't see how only gaining 2% the first year is going to break this plan.

I'm not saying it will never not work, and I'd definitely recommend a bond/equity mix, but it isn't as dire as some of you are making it to be.

[/ QUOTE ]
"Made up for" is a risky term. If we get hit hard up front it's going to be very hard for the market's outperformance to catch up since we start withdrawing on day one.

This is the sort of problem where you need to put risk of ruin above expected return.